Why the Mansion Tax can’t and won’t work

The other week at the Labour party conference we saw the unedifying spectacle of the two Eds (that’s Balls and Miliband for those who aren’t sure :)) trying to win back their core electorate. Or at least, who they perceive to be their core electorate. Somewhat unsurprisingly, this seemed to entail a regressive shift in rhetoric, with the language echoing that of the Labour Party in the seventies and eighties. For those too young to remember, during this period class war was at the top of the agenda and the trade union had the party in a militant, iron-clad grip. It speaks volumes that Citizen Smith was a hugely entertaining and yet somewhat true-to-life television programme during this era: it reflected the ridiculousness of “loony leftism” that seemed to have manifested itself firmly in the impressionable minds of the nation’s youth. Where the “bourgeoisie” was seen as an unrelenting source of evil oppressing the put-upon masses – and life was uncomplicated, rendered black and white by these incontrovertible Marxists.

Yes, those were the days. Reminiscent of an era long-gone – when the proletariat really did live in poverty – yep, no smart phones for them! However, as far as the Labour Party’s concerned, this period of history seems to be making something of a comeback. This was epitomised at the conference by the announcement of the ridiculously illogical and badly thought-out Mansion Tax, which would be introduced were Labour to win the election next year. The move, albeit not entirely unexpected, indicates a strong move by the party towards the populist Left.

The proposal is to tax property over £2 million. To many across the country, this will sound like a lot of money – however, in London this sum won’t really get you very much at all (yes, really). In Prime London this would buy you a two-bed apartment (just about) and wouldn’t even get you a four-bed house in a popular area like Islington. The money might go a bit further in a less desirable London suburb – but you get the drift – the point is that these properties are hardly “mansions”.

How would the tax work?

The tax would allegedly raise some £1.2 billion in revenue. However, experts claim that this is not likely to happen, leading to speculation that the threshold (as with inheritance tax and stamp duty) will drag lower-priced properties into the net. And once this happens, we all know that governments are frequently unwilling to roll back taxes once they’ve been introduced, so this could end up being a levy simply on those who have the audacity to own a half-decent property and live in the UK capital. What’s most disturbing about the policy is that there could be a rise in cash-rich, asset-poor pensioners forced to sell up because they can’t pay. After all, the amount being floated is pretty onerous. Although Ed Miliband has said that those who can’t pay will be exempted from the charge, even for those on a high income, £16,000 a year is a steep amount. Also, the levy is likely to be rolled forward in the form of a death tax, potentially doing exactly what the tax is meant to avoid: stop the younger generation becoming home owners.

Tribunals and neglected homes

As with all taxes, there are knock-on effects. However, the Mansion Tax is highly likely to be much more costly to implement in comparison to what it will yield in revenue. This is because there may well be a deluge of tribunals regarding properties which are just on the tax threshold. And as the taxman isn’t qualified to value property, many people could end up being accused unjustly of avoidance. For example: if your property is around the £2 million mark, one surveyor could put it at £1.9 million, another £1.8 million and another £2.2 million. Who’s right? This is the problem with assets such as property: they’re very hard to value as they’re only worth as much as someone’s willing to pay for them. It’s also likely that property owners won’t bother to renovate their properties in order to make sure their home doesn’t breach the limit – perhaps having a negative impact on the construction industry.

This won’t affect the truly super-rich

The super-rich may resent paying the Mansion Tax but ultimately they can afford to pay it – although let’s be clear: they probably won’t end up coughing up. More likely they will employ an army of lawyers, something middle class home owners can’t afford to do. Worse still, could we see a mass exodus of those who feel unfairly targeted, just like we did when the top rate of tax was 90 pence in the pound? Some may resent affluent home owners for their good fortune, but ultimately we need entrepreneurs who create jobs and wealth in our country. Even if some young business men and women don’t yet own a property worth this much, the message will be clear: aspiration and hard work is not rewarded in the UK.

Realistic option

Even Ed Miliband seems unsure as to how this tax will be rolled out. Of course many MPs will have to answer to their constituents – and inevitably in London this will include those who have expensive properties. So there has been a bit of a backlash, with Labour politicians demanding to know how the policy will be implemented. A revaluation of council tax bands is a far more realistic option and in practise is likely to bring in more revenue. However, it’s a fair bet that many, particularly those in London and the south, will have moved up a couple of bands and could still be forced to uproot and downsize. As well as this, any revaluation will not solve the underlying problem of those living off a pension. The people who are most likely to be affected by any change in the tax law are the ageing population; not those currently in full time employment. Mostly because 30 to 50 somethings are not the ones with the million pound houses – it’s their parents who are going to have to take the hit.

The Mansion Tax proposal is populist politics feeding into people’s worst instincts: envy. Unfortunately it’s just another tax that the more affluent middle classes will start off paying for, which could eventually filter down to everyone. There are other more efficient ways to bring down house prices – such as changing ridiculous planning laws which allow local authorities to hoard land. Stamp duty also doesn’t help – this needs to be completely revoked for first-time buyers, as it adds to the heavy burden they already bear when buying their first home.

As you can see, we’re not a fan of this policy. Fortunately we’re not convinced it’ll last that long once the details become clear and the difficulty of administering such a tax becomes increasingly evident.

The property industry has always, and continues to, interest me. Since joining Plaza Estates in 2008, I have learned a great deal about the market. My role involves advising clients on their purchases (together with our sales teams), managing refurbishments for them (together with our management and design team), preparing the property for rental (together with our rentals teams) or sale, and being responsible for the company’s digital marketing. Through all this, I have viewed the market from different angles. The market is always changing, and it is essential to adapt as it does so. This is something Plaza Estates has always done.